This week, PERE held its annual Asia roundtable in Hong Kong with six of the region’s prominent real estate investment managers. At a time when Asia, similar to the US and Europe, is facing cyclical, geopolitical and structural challenges, here are four salient takeaways from the discussion for institutional investors actively investing in Asia.

1. US-China trade war rhetoric is a reality. What now?: The last twelve months have seen a fundamental shift in investors’ view of risk in the region, with an equal, if not greater, emphasis on macro uncertainty as compared to real estate fundamentals, the participants agreed. And the “elephant in the room”, one manager noted, is the question of where the trade war is heading, which no one has the answer to yet.

This raises the question of how such risk is priced while investing in China or elsewhere in Asia. One core manager said pricing would need to be reset only when the trade war starts having a material impact on the occupier market in the region, which is not the case yet. Meanwhile, a manager running a higher risk strategy said she is paying more attention to the income profile of potential investments and how the credit quality can be managed to a reasonable duration risk.

2. Another reality – China and India’s deleveraging drive: Regulators in two of Asia’s biggest growth economies are ramping up deleveraging efforts to clean up the balance sheets of some of their large debt-laden conglomerates. These efforts are including real estate developers. As these groups in India and China struggle to raise finance from banks as well as non-banking financial companies, opportunities for alternative credit lenders will increase. Additionally, portfolio divestments by conglomerates to meet their debt obligations will create buying opportunities for opportunistic managers. The latest example is a liquidity crisis at Infrastructure Leasing & Financial Services, one of the biggest infrastructure developers and non-banking financial institutions in India. As a government-appointed board weighs on possible bailout measures for the firm, which has a reported debt of 910 billion rupees ($12.3 billion; €10.8 billion), global infrastructure managers are already readying their bids for some of its infrastructure assets, PERE’s sister publication Infrastructure Investorreported.

3. Income, not cap rates, to drive total returns in Asia: According to one manager, total returns for a core strategy in Asia were more than 11 percent over the past five years, with a yield of 4.5 percent. However, with cap rates compressing to record lows in some markets, total returns could drop to 8.5 percent for the next few years. In Australia, for instance, cap rates have dropped below historical norms, with a grade A asset in a prime location in Sydney trading at 4.5 percent. However, the consensus in the room was that investors have come to accept the reality of lower total returns. The emphasis now is on dividend yields and ensuring the income stream of the asset is secure and stable.

4. And when income is secured, core strategies can take more risk: There have been recent examples of core managers in Asia taking on investments that do not fit the classic definition of core. According to one manager, taking some level of development or leasing risk is justified, so long as the income stream is guaranteed. For instance, London-headquartered real estate manager M&G is understood to have received a two-year income guarantee from the developer of Centropolis Towers, a twin office tower asset in Seoul it acquired alongside other partners for 1.18 trillion won ($1.05 billion; €765 million) in July. These types of risks will be further justified as open-ended core funds in Asia get bigger in size, one manager added. They do however have some way to go before they match their better-established US counterparts. According to industry body Asian Association of Investors in Non-listed Real Estate Vehicles, ANREV, four of the biggest Asia-Pacific open-ended core funds had a total gross asset value of $8.4 billion as of the second quarter of 2018. In comparison, 36 US open-end core funds had net assets of $190.4 billion, as of Q2 this year, according to industry body NCREIF.